NEW YORK—Buy now, pay later (BNPL) options are becoming increasingly popular, but analysts are warning of default risks given the lack of credit checks and “opaque” debt reporting.
As CUToday.info has reported, the rapidly growing BNPL solutions do not require a credit check. But not checking consumers’ credit history could lead to lenders underestimating borrowers’ debt levels when assessing new loan applications, a number of analysts have cautioned, according to CNBC. Moreover, there is also the risk of consumers chalking up more credit card debt in order to pay off their BNPL obligations, analysts warned, the report added.
BNPL providers usually enter into a relationship with retailers — both online and in stores — to offer consumers the option to pay in installments, with perks including no late fees and often high loan limits.
“Such payment options are growing in popularity among younger consumers especially for online shopping, and an increasing number of companies have started offering the service in the past couple of years,” CNBC said. “The sector came under the spotlight … when digital payments company Square announced a $29-billion deal to buy Australia’s buy now pay later provider Afterpay.”
CUToday.info reported the acquisition here.
‘Underestimating’ Debt
In a recent report, Fitch Ratings said the sector’s debt performance reporting is “opaque.” Many such providers do not report the use of such services to credit bureaus, the ratings provider said, according to NCBC.
“Consequently, BNPL debt is often not visible on the credit file and borrowers could try to get BNPL credit from multiple providers,” Fitch analysts wrote. “Lenders (including non-BNPL) could underestimate a borrower’s debt level when underwriting new debt.”